Conclusions and Outlook. Among an appropriate class C of covariance struc- tures, we characterize the largest possible r
Robust Maximization of Asymptotic Growth under Covariance Uncertainty Erhan Bayraktar and Yu-Jui Huang Department of Mathematics, University of Michigan
Our Goal
The Question
π∗
∗
Choose an π ∈ V s.t. V
How to maximize the growth rate of one’s wealth when precise covariance structure of the underlying assets is not known?
∗
Take η ∈ Hλ∗(E)(E). Define
attains the rate
∗ πt
sup inf g(π; P) π∈V P∈Π
uniformly over all P in Π (or at least in a large enough subset Π∗ of Π).
The Set-up d
When c ∈ C is fixed...
d
Let E ⊂ R be an open connected set, and S be the set of d × d symmetric matrices. • X: price process of d assets taking values in E. 0,α • θ, Θ : E 7→ (0, ∞) are functions in Cloc (E), and satisfy θ < Θ in E. • C: set of functions c : E 7→ Sd s.t. for any x ∈ E,
For any D ⊂ E and λ ∈ R, we consider c Hλ(D)
c(·)
2
:= {η ∈ C (D) | L η + λη = 0, η > 0},
:= e
and set
λ∗(E)t
∗
∇η (Xt) ∀ t ≥ 0,
∗ log η (Xt) ∗ Π := P ∈ Π P- lim inf ≥ 0 P-a.s. . t→∞ t Then, we have • Π∗ is large enough to include all the probabilities in Π under which X is stable. • λ∗(E) = sup inf∗ g(π; P) = inf∗ sup g(π; P).
• π∗
π∈V
P∈Π
P∈Π
π∈V
∈ V and g(π ∗; P) ≥ λ∗(E) for all P ∈ Π∗.
and define the principal eigenvalue for Lc(·) on D as ∗,c
λ (D) := sup{λ ∈ R |
c Hλ(D)
6= ∅}.
∗
In [3], the authors take η ∗,c
Π
:= P ∈
c Π
∗,c
P- lim inf
c ∈ Hλ∗,c(E)(E) log η ∗,c(Xt)
and define
≥ 0 P-a.s. .
t
t→∞
∗,c
Proving “λ (E) = inf c∈C λ (E)”
θ(x)Id ≤ c(x) ≤ Θ(x)Id. Remark. Each c ∈ C represents a possible covariance structure that might materialize. The (Knightian) uncertainty is captured by θ and Θ.
Conclusions and Outlook
Main Result
Assume: there exist {En}n∈N of bounded open 2,α ¯ convex subsets of E s.t. ∂En is of C , En ⊂ En+1 S∞ ∀ n ∈ N, and E = n=1 En.
They show that • Π∗,c is large enough to include all the probabilities in Πc under which X is stable. • λ∗,c(E) = sup inf∗,c g(π; P) = inf∗,c sup g(π; P). ∗,c • πt
π∈V ∗,c
:= eλ
P∈Π
(E)t
P∈Π
π∈V
• (L
Selected References
• Qc:
Recall Pucci’s operator: given 0 < λ ≤ Λ, + Mλ,Λ(M )
the solution to the (generalized) martingale problem on E for the operator Lc(·). • Πc:= {P | P loc Qc, X doesn’t explode P-a.s.} S c • Π:= c∈C Π . • π ∈ V (admissible trading strategy): predictable process s.t. the following holds for all c ∈ C: (i) π is X-integrable under Q ; Rt 0 π (ii) Vt := 1 + 0 πsdXs > 0 Qc-a.s., for all t ≥ 0. c
• Asymptotic
growth rate of V π under P:
:= sup γ ∈ R n
(≈ sup γ ∈ R |
:=
sup A∈A(λ,Λ)
Tr(AM ), ∀ M ∈ S ,
d
Define the operator F : E × S 7→ R by 1 F (x, M ) := sup Tr(AM ). 2 A∈A(θ(x),Θ(x)) For any D ⊂ E and λ ∈ R, we consider 2
Hλ(D) := {η ∈ C (D) | F (x, D η)+λη ≤ 0, η > 0},
π P- lim inf (log Vt /t) ≥ γ P-a.s. t→∞ o π γt Vt ≥ e as t large P-a.s. )
.
Sketch of proof: 1. On each En, show the existence of a positive viscosity solution ηn (by using [5]) to
and define the principal eigenvalue for F on D as ∗
λ (D) := sup{λ ∈ R | Hλ(D) 6= ∅}. Now, by using the arguments in [3] and the relation λ∗(E) = inf c∈C λ∗,c(E), we obtain
∗
2
F (x, D η) + λ (En)η ≤ 0.
d
where A(λ, Λ) denotes the set of matrices in Sd with eigenvalues lying in [λ, Λ].
2
g(π; P)
For Further Information
∇η ∗,c(Xt) ∈ V satisfies
When c ∈ C is NOT fixed... ∂ 2f 1 Pd f )(x):= 2 i,j=1 cij (x) ∂xi∂xj (x) 1 2 = 2 Tr[c(x)D f (x)].
The covariance uncertainty we consider is similar to the “Knightian uncertainty” formulated in [2], in the sense that the constraint on covariance is Markovian. The latter, however, is more general as it allows the covariance itself to be non-Markovian. It is of interest to generalize our results to the case with non-Markovian covariances, which would lead to eigenvalue problems for path-dependent PDEs.
• Yu-Jui Huang is available at
[email protected] • Preprint of our paper can be downloaded from www.arxiv.org/abs/1107.2988 • This poster can be downloaded from http://www-personal.umich.edu/∼jayhuang
g(π ∗,c; P) ≥ λ∗,c(E), ∀ P ∈ Π∗,c.
c(·)
Among an appropriate class C of covariance structures, we characterize the largest possible robust asymptotic growth rate as the principle eigenvalue ∗ λ (E) of the fully nonlinear elliptic operator F , and identify the optimal trading strategy in terms of ∗ λ (E) and the associated eigenfunction.
2. Show that ηn is actually smooth (using [6]). 3. Show λ∗(En) = inf c∈C λ∗,c(En).
(i) ≤: Use a maximum principle related to F . (ii) ≥: Use the theory of continuous selection in [1] to construct {cm}m∈N ⊂ C s.t. ∗
∗,cm
λ (En) ≥ lim inf λ m→∞
(En).
4. Show λ∗(E) = λ0 := limn→∞ λ∗(En).
(i) ≤: obvious from definitions. (ii) ≥: Prove a Harnack inequality for F , and use it to show ηn converges uniformly on E to some η ∗ ∈ Hλ0 (E).
5. Since λ∗,c(E) = inf n∈N λ∗,c(En) for each c ∈ C (by [4]), we have ∗,c
∗,c
∗,c
inf λ (E) = inf inf λ (En) = inf inf λ (En)
c∈C
=
c∈C n∈N ∗ inf λ (En) n∈N
∗
n∈N c∈C
= λ (E).
[1] A. L. Brown, Set valued mappings, continuous selections, and metric projections, J. Approx. Theory 57 (1997), pp. 48-68. [2] D. Fernholz and I. Karatzas, Optimal arbitrage under model uncertainty, Ann. Appl. Probab. 21 (2011), pp. 2191-2225. [3] C. Kardaras and S. Robertson, Robust maximization of asymptotic growth, to appear in Ann. Appl. Probab, (2012). [4] R. G. Pinsky, Positive harmonic functions and diffusion, Cambridge University Press, Cambridge, 1995. [5] A. Quaas and B. Sirakov, Principal eigenvalues and the Dirichlet problem for fully nonlinear elliptic operators, Adv. Math., 218 (2008), pp. 105-135. [6] M. V. Safonov, Classical solution of second-order nonlinear elliptic equations, Izv. Akad. Nauk SSSR Ser. Mat. 52 (1988), pp. 1272-1287.
